Exchange rate stability far from sight

THE foreign currency market entered its 7th week of trading since the promulgation of the weekly auction system on the Reuters trading platform.
A total of US$18,53 million (supply) exchanged hands out of the required US$19,7 million (demand), resulting in a supply rate of 95% (required/allotted %).

Respect Gwenzi

This is the highest demand satisfaction rate since the inter-bank comeback in June. The weighted average exchange rate between the Zimbabwean dollar and the US dollar moved inversely from 1:77 last week to 1:80,5 in the week under review, a 5% week-on-week loss in currency value. The bid spread, which is a measure of the difference between the highest bid and lowest bid narrowed from its lowest point since the resumption of interbank of 12 from 17 in the previous week.

This was mainly driven by a movement of the higher bid from a stable 82 to 87. Likewise, the lowest accepted bid moved upwards in line with strong demand. We continue to look at how the market is evolving and analyse these broader trends as we have done on a weekly basis since week 1.

The bid size has grown from US$11,4 million in the first week to US$19,7 million in the current week. A growth in bid size means demand is growing in real terms but so has been supply. From a low of US$10,3 million in the first week to US$18,7 million in the current week, supply has increased but at slower rate to demand.

The current week saw the level of supply move up faster than the level of demand. At US$18,7 million, supply was 95% of total demand up from US$14,36 million which equated to 74% of total demand, last week.

Over the last five weeks the disproportionate growth in supply relative to demand had gradually exerted pressure on the average exchange rate which has lost an average of 5,5% over the seven-week period.

The bid dynamic has since shifted from a five-week trend of tightening bid spread to a narrowing spread in the latest week. In fact, the top bid and bottom bid, had prior to this week’s auction moved towards each other, leading some observers to believe that the market was moving towards stabilisation and effective price discovery.

Last week, we warned that despite this technical indicator showing positive signs over the period, the growing disparity between demand and supply levels was a deterrent to rate stabilisation.

In our last edition we warned that the trend was about to reverse as it ultimately did in the week under review. We wrote: Our technical view is that there remains pressure for upward movement in the exchange rate based on a slowdown in the decline in top bid.

The top bid has since stabilised and, given the downward pressure of growing bid size and lower bid, may call for trend reversal in successive sessions. We also warned against relying solely on technical indicators in determining whether the rate is stabilising or not and the possible rate it would stabilise.

We maintain that fundamental view focussed on monetary aggregates which have a direct impact on exchange rate shows observations which are largely tilted towards further destabilisation of the exchange rate.

Latest weekly money supply data shows that growth of almost $3 million in base money supply in the week to July 24. The growth was however due to government’s expenditure funded through its RTGS surplus account.

The aggregate however has been very unstable and on a year to date scale has grown by over 50%, which is beyond the Monetary Policy Committee (MPC) target.
May money supply data released by the RBZ also shows growing foreign obligations by the central bank which may represent a foreign currency facility secured partly to satisfy foreign currency needs on the inter-bank.

While the apex bank is frantically trying to contain the aggregate with the help of the MPC committee, there is immense pressure on the horizon emanating from a bloated fiscus and huge fiscal deficits which will be created by inflationary pressure.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net